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Israel unlikely champ in global real estate

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[October 14, 2010]  JERUSALEM (AP) -- Israel, despite perennial fears of war, has emerged as one of the hottest -- and least likely -- property markets in the world: Since real estate collapsed around the globe in 2008, at least one industry watchdog lists it as the fastest-rising property market on earth.

InsuranceBut with global economic meltdown -- and the subprime mortgage fiasco that precipitated it -- still fresh in people's minds, officials are stepping up efforts to rein in its overheated property sector. The fear is that a property bubble could shake confidence in an economy that withstood the worst of the world's financial crisis.

In the span of months, the central bank has raised interest rates several times and the government is rallying to build new units in this land-strapped country.

"The housing market has set off enough crises, and we're not going to let that happen in Israel," Bank of Israel Governor Stanley Fischer said earlier this month in announcing his sixth rate hike in just over a year.

According to Global Property Guide, a trade magazine that monitors the housing market, Israeli housing prices in the second quarter of 2010 rose sixth-fastest in a ranking of 36 countries. Four of the top five, including Singapore and Latvia, were rebounding from sharp price drops. So looking at the past two years ended in June -- the last period for which there is data -- Israeli real estate clocks in at No. 1.

For Israel, where high-tech and science are booming businesses, the property price spike is the latest claim to fame. But it's one officials aren't boasting about, given ample evidence of how an imploding bubble can shatter decades of economic growth.

Examples of the danger of an overheated market litter the globe. From Dubai to Detroit, housing prices plummeted amid the global meltdown beginning in 2008. Defaults on mortgages surged in the United States while in Dubai, the one-time Arab boomtown, property prices tumbled by about 50 percent in 2009.

Amid that downturn, Israel stood firm, shielded in part by the fact that its property price gains were late in coming. While many countries were on a property high during the middle part of the decade, its market was largely stagnant.

Its banks offered nothing close to the U.S.-style subprime mortgages, and Israel's financial market is not intertwined with the mortgage market -- the main reason for the U.S. housing meltdown. Down payment requirements remained high, often equal to more than 40 percent of a house's value.

Adding to the mix was a conservative local banking sector whose broader dislocation from the global market helped to shield Israel from the worst of the global meltdown.

What fueled the boom, however, were rock bottom interest rates and a relatively low supply of housing. The result was a nearly 30 percent jump in property prices since September 2008.

For Israelis, those gains are hard to swallow.

After extensive house hunting, Ami Kaufman and his wife stopped looking at the "good" neighborhoods of Tel Aviv: At $600,000 for an unrenovated, three-bedroom measuring about 1,000 square feet (100 meters), it's simply out of reach.

Instead, the couple are looking at a working-class area in the hope it will gentrify like other down-and-out Tel Aviv neighborhoods did. They're hoping to find something within the year, before they're pummeled by rising mortgage prices on top of rising housing prices.

"The problem ... is demand versus supply," Kaufman said. "Too many people want apartments. Nothing is going to stop these rises."

Housing supply, says Vered Dar, chief economist at the Psagot-Ofek investment house in Tel Aviv, was "thrown out of whack" by the mass immigration of some one million immigrants from the Soviet Union 20 years ago. Housing starts surged excessively in the ensuing years, leaving contractors and the government struggling to find a balance.

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Over the past five to six years, "they didn't build enough," she said, adding that housing was not something that could be imported to balance supply and demand.

"It takes time," she said.

But it's time that Israelis, increasingly, can't afford.

Today, a three-bedroom apartment in Tel Aviv, with its beaches, balmy weather and freewheeling spirit, fetched an average 2.15 million shekels, or $560,000, in June, compared with 1.73 million shekels a year earlier, according to government statistics.

The price of an average apartment in Jerusalem, with its holy sites and mixture of ancient and new, rose 19 percent to 1.55 million shekels, or $403,000, at the end of June from 1.31 million shekels a year earlier.

The prices seem out of sync with the average income in a country where the per capita GDP of some $30,000 is around the OECD average, but taxes are very high.

Parents, once able to buy their children apartments outright or give big chunks of down payments, are no longer able to do so. Even professionals are struggling to come up with the cash for housing. As a result, many find themselves simply unable to buy or are compromising on their dream houses.

The central bank's efforts to rein in prices with interest rate hikes have provoked government resistance, with the Finance Ministry worried that Fischer's rate hikes could hurt the economy by strengthening the shekel against world currencies and battering the vital export-oriented high-tech industry.

But officials have also not sat idle. The country's skyline is dotted with apartment towers and cranes, and a recent reform in the government-run Israel Lands Administration is designed to free up more land for construction.

Even before that reform was enacted, housing starts were up more than 20 percent in the second quarter of 2010 from the first three months of the year. Finance Minister Yuval Steinitz, however, told a business conference on Tuesday that it would take up to two years to solve the supply-side problem.

Dar, the economist, has long disputed assessments that Israel was experiencing a housing bubble. She describes it as "more babble than bubble" because the recent boom follows roughly a decade of stagnant prices in inflation-adjusted terms.

If prices continue to rise at the current pace, however, "it will start to bubble," she said, while predicting that price rises would taper off as supply increases and interest rates climb.

There are signs that might already be happening: Shekel-denominated prices in the second quarter of the year inched down 1 percent from the first quarter.

[Associated Press; By AMY TEIBEL]

Copyright 2010 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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